Bankruptcy May Soon Wipe Out Student Loans

The Department of Education may be getting prepared to influence new rules allowing bankruptcy to eliminate student debt. This news will surely come as a hopeful relief to borrowers struggling with student debt. In an announcement this week the Education Department stated that it would be reviewing the ability for student loans to be discharged in bankruptcy.

Student Loan Relief Under Threat

Programs that help borrowers currently, such as income-driven repayment, defense against repayment, and public service loan forgiveness may come into the crosshairs next year, which is why this conversation is arising. The White House’s fiscal year 2019 budget mentions a number of steps which could adversely affect individuals who borrow to earn a university or college degree. These proposed changes include consolidation of income-based loan repayment plans, ending the public service loan forgiveness program, emboldening the government to go after borrowers in default, and cutting funding for federal work-study programs.

Making it easier for borrowers to discharge

You cannot, except in extreme circumstances, eliminate student loans using bankruptcy. Many courts use an “undue hardship test” as a benchmark for discharging student debt in which students have been able to discharge some or all of their student debt by proving they are living below the poverty line or would be if forced to pay back student loans. The other factors that Bankruptcy Judges weight in considering undue hardship are that your financial situation will persist during the repayment and that you have made a good faith effort to repay your student loans. Bankruptcy Courts report a less than 1% chance of being able to prove an undue hardship, however.

In a Chapter 7 bankruptcy case, if payment of your student loan debt isn’t an undue hardship the balance will remain after your bankruptcy discharge. In Chapter 13 bankruptcy, discharging your student loans simply isn’t an option. You may be able to reduce the payment amount during the course of your Chapter 13 repayment plan but will still owe the remaining balance after your bankruptcy plan is finished.

How Student Loan Got This Bad and How to Fix It

Student loan discharge in bankruptcy may be just a small step in the grand scheme of things because the sheer volume of student loan debt in America, which currently stands at $1.52 trillion and counting. Government subsidies student loans which have increased demand for higher education degrees in the US. Because of this, the universities have increased rates to match what the market will bear. The ease of borrowing, the rapid decline in state support, and the increasing cost of education have all been cited as reasons why the Federal Government has become more involved in student loans in the last 20 years. Activists, some Democrats, and consumer groups have been asking to allow for a discharge of student loan debt in bankruptcy for some time now and it remains a high priority. Bankruptcy attorneys in Dallas who work with student loan borrowers say that considering adding the ability to discharge student loan debt in bankruptcy isn’t’ necessarily a bad thing.

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